Various laws applicable to co-operative banks & co-operative societies in maharashtra

1. The Maharashtra Co-operative Societies Act, 1960 (MCS Act) and The Maharashtra Co-operative Societies Rules, 1961 are applicable to any co-operative society registered in Maharashtra and having no branches outside Maharashtra. Many other states (Gujarat-1962, Delhi-1972, etc.) have also enacted their own State Co-operative laws. If any state does not have its own State Act, the Co-operative Societies Act, 1912 and Rules become applicable.

2. However, if a society has operations beyond one State, it is governed by a Central Act viz. the Multi-State Co-operative Societies Act, 2002 (MSCS) and its Rules.

3. Co-operative banks are also governed by the Reserve Bank of India under Banking Regulation Act, 1949 as amended by the Banking Laws (Application to Co-operative Societies) Act, 1965 and the Banking Regulation (Co-operative Societies) Rules, 1966. As per section 5A, the provisions of this Act override the ones in the MCS Act or the Rules or Bye-laws. Certain clauses of Reserve Bank of India Act, 1934 are also applicable to co-operative banks.

4. The income earned by a co-operative society is subject to income tax under the Income-tax Act, 1961 and its Rules. It may be noted the income of a co-operative society is eligible for deduction u/s 80P of the Income-tax Act and not an exemption u/s 10. Hence, it is mandatory for all co-operative societies to file income tax return.

5. The Foreign Exchange Management Act, 1999 as well as the Service Tax rules are also applicable to co-operative banks.

6. The execution of loan and other documents are subject to rules applicable to the place where such documents are executed. Thus, for documents executed in Maharashtra, the Bombay Stamp Act (as applicable to Maharashtra) is applicable, while for documents executed in Gujarat, the Bombay Stamp Act (as applicable to Gujarat) is applicable. Both these Acts are different, though the name is the same. For certain provisions not contained in this Act, the Indian Stamp Act becomes applicable.

7. Co-operative societies are also governed by circulars, notifications and directives issued from time to time by the various departments of co-operation. Co-operative banks are further governed by circulars issued by Reserve Bank of India (for details see www.rbi.org.in)

8. A society is also bound by its bye-laws. It has also to follow various accounting and assurance standards issued by the Institute of Chartered Accountants of India.

Important provisions of the mcs act and the rules

1. Chapter I (sections 1 and 2) deals with various definitions

• Under section 2(27), “society” has been defined as “a co-operative society registered or deemed to be registered under this Act”. Though co-operative society has not been defined, section 4 states that a society which could be registered is one which has objects for promotion of the economic interests or general welfare of its members or of the public in accordance with the co-operative principles.

• The person governing this Act is called “Registrar”. In Maharashtra, he is known as “Commissioner of Co-operation and Registrar of Co-operative Societies”.

2. Chapter II (sections 3 to 21) deals with registration, amendments, amalgamation, re-organization and deregistration of societies.

• Sections 4 to 11 deal with matters relating to registration of society. Under rule 10, after registration of the society, the Registrar has to classify the society into any one class and sub-class. There are 12 classes and 20 sub-classes listed in this rule.

3. Chapter III (sections 22 to 35) deals with matters relating to members, their rights and liabilities.

• As per section 22, an individual, who is competent to contract, a firm, company or other body corporate, a registered society, a local authority, a public trust and government can become members of the society. If a person has applied for admission and the society does not communicate any decision within 3 months of receipt of such application, the applicant is deemed to have been admitted as member of the society. Section 25 of MSCS Act permits any person competent to contract to become a member.

• Section 24 provides for admission of nominal, associate and sympathizer members. These members have limited rights in the society compared to regular members.

• Section 27 provides that during meetings, members have to remain present in person and no proxies are allowed. Further, one person is allowed one vote only, no matter how many shares he holds.

• Section 28 provides that no member can hold shares exceeding 1/5 of the share capital of the society or Rs. 20,000/- whichever is less. Under section 33 of the MSCS Act, maximum shareholding can be as provided in the bye-laws, subject to a ceiling of 1/5 of the share capital. However, for co-operative banks, RBI has laid a limit of 25% of the capital up to a maximum of Rs.1 lakh. (UBD.No. Plan.10/UB.32/92-93 dt. 26th May, 1993)

• Urban co-op. banks are not permitted to issue bonus shares (RBI circular UBD.No. Plan. Cir.PCB.9/09.20.00/2000-01 dt. 10th November, 2000)

• As per rule 20, shares can be issued in joint names. Minors and persons of unsound mind, inheriting the share of a deceased member, can also be admitted as member through their legal representatives or guardians.

• Section 29(2)(a) states that a member cannot transfer his shares until he has held it for one year.

• Section 29(3) permits a society to buy back its shares from its members on their resignation etc., up to a maximum of 10% of the paid-up share capital every year. Rule 23 further provides that the amount to be paid back should be based on the valuation of his share, which in no case should exceed the amount paid for the purchase of those shares.

• Section 30 read with rule 25 provides for nomination, including nomination of a minor or a person of unsound mind.

• Rule 21 permits a member to resign by giving 3 months’ notice.

• As per section 35 read with rule 28, a member can be expelled from the society by a resolution passed by not less than ¾th of members entitled to vote, who are present.

4. Chapters IV to VIII (sections 36 to 90) deal with matters relating to incorporation, duties and privileges, State’s aid, property and funds, management and audit, inspection and supervision of the societies.

5. The subsequent chapters (sections 91 to 167) deal with settlement of disputes, liquidation of societies, agriculture and rural development banks, elections of committees and officers of certain societies, offences and penalties, appeal, review and revision and other miscellaneous issues relating to societies.

Section 161 states that all auditors (including certified auditors) are deemed to be public servants within the meaning of section 21 of the Indian Penal Code. Thus, auditors enjoy the rights and bear the responsibilities of public servants.

Types of audit

Co-operative societies are subjected to various types of audits as prescribed under the law — statutory audit u/s. 81(1), cost or performance audit u/s. 81(2A), flying squad audit u/s. 81(3)(b), test audit u/s. 81(3)(c) and re-audit u/s. 81(6). The requirement of internal audit, though not mandatory under the law, is generally provided under the bye-laws.

The Reserve Bank of India has mandated co-operative banks to carry out concurrent audit (RBI Circular UBD No. BPD. Cir. 37.09.06.00 dated March 6, 2003) as well as EDP audit (RBI letter UBD No. POT/PCB.30/09.96.00 dated 12th February, 2002). Stock & Book Debt audits are required to be carried out for large borrowers.

Specific features of audit

Chapter VIII of the MCS Act and Chapter VII of the MCS Rules deal with matters pertaining to audit, inquiry, inspection and supervision. RBI has issued Master Circular on Inspection & Audit Systems in Primary (Urban) Co-operative Banks (RBI/2009-10/83 UBD. CO.BPD.(PCB).MC. No. 9 /12.05.001/2009-2010 dt. July 1, 2009)

• Appointment and Fees – Under section 81(1)(a), certain societies listed therein are to be audited by the auditors appointed by the office of the Registrar. Under section 81(1)(b), all societies other than those listed in section 81(1)(a) can get their accounts audited from a panel of auditors maintained by the Registrar or by a Chartered Accountant holding certificate in co-operative audit issued by ICAI. Under rule 69(1), departmental auditors, certified auditors which includes Chartered Accountants, certain diploma holders and ex-staff of co-operative department are eligible to be appointed as auditors. As per rule 74, the fees are fixed by the Registrar. The last circular fixing the fees was issued under Order No. CC/ADT/Scale of audit fees of 92 dt. 15th May, 1992.

However, under section 72(1) of the MSCS Act, only Chartered Accountants can be appointed as Auditors and their remuneration can be fixed either by the general body or by the Registrar.

• Audit — Rule 69(2) provides that if the appointment of an auditor is made for a particular year, but the audit of previous year(s) is still pending and no auditor has been appointed for those years or the auditor appointed has resigned, then the present auditor can conduct the audit for all the previous completed years for which the audit has not been done.

Section 81(5B), read with rule 69(3) provides that besides audit report, the auditor has to submit Audit Memorandum in the prescribed format. Further, as per rule 69(7), the summary of this Audit Memorandum is to be read in general meeting.

Rule 69(9) requires statutory auditor to award audit classification (A, B, C, D) to the society based on certain criteria. For this purpose, department has issued certain guidelines (Cir. No. CC/ADT/A/UGB /A.B/ of 1992 dt. 29th July,1992) followed by Circular No. CC/ADT/A/ACB/AC/15/2005 dated 7th January 2005 issued by Hon’able Commissioner of Co-operation of Maharashtra. Similar circular has also been issued by RBI (UBD. No. POT.27/ 09.06.00/93-94 dt. 17th August, 1993). RBI also classifies banks into 4 grades (I, II, III & IV), Grade I being that the bank is sound (UBD. No. IP.RCS.2/12.05.03 dated 25th April, 2003).

• Books & Registers — In addition to regular books of account, section 79 read with rule 65 requires the society to maintain certain additional books which include Register of Members in Form I, (Section 38, Rule 32), List of Members in Form J, (Section 39, Rule 33), Register of shares, Register of debentures and bonds, Minute books of general meetings and board meetings, Surety register, Register of audit objections and rectification in Form O (Rule 73) etc.

• Statement of accounts & its verification — As per rule 61, annual statement of accounts have to be prepared by the society within 45 days of the close of the co-operative year. Rule 62 states that the balance sheet and profit & loss account have to be prepared in Form ‘N’ by all the societies.

However, co-operative banks have to prepare balance sheet and profit & loss account in Form ‘A’ and ‘B’ as prescribed u/s. 29(1) of the Banking Regulation Act, 1949. The said statements have to be published in one of the local newspapers within 9 months of the close of the co-operative year.

RBI has mandated banks with deposits of Rs.100 crores and above to make certain disclosures under “Notes to Accounts” effective from year ending 31st March, 2003 (Circular UBD.CO.BP.PCB.20/16.45.00 dt. 30th October, 2002)

The balance sheet format of a co-operative society/bank and commercial banks is quite different. In a co-operative institution, loan, other assets etc. are all shown at gross figures and the overdues, NPA provisions, provision for other doubtful assets are reflected on the credit side, while in a commercial bank, the said figures are netted out.

• Floating charge — Under section 14-A of the Banking Regulation Act, a society cannot create a floating charge on its assets. Section 45 of the MCS Act lays down restrictions on transactions of a society with non-members.

• Section 65 provides that appropriations of profit should be entered in the books of account only after the annual general meeting approves it.

• Dividend — Section 67 lays down that a maximum dividend of 15% can be given by the society (additional dividend can be paid with Registrar’s approval). However, rule 24(2) of MSCS Act provides that dividend is to be paid as specified in the bye-laws. For co-operative banks, RBI has placed restriction on dividend being declared by them, especially those not classified as Grade I (UBD. No. BSD.IP.PCB.16/12.05.03 dated 19th Sept. 2003)

Verification of items on liability side of balance sheet

(i) Membership, Share Capital & Voting

• Under the head ‘Share Capital’, ‘individuals’ means share capital of all excluding co-operative institutions and State Government.

(ii) Reserve Fund & Other Reserves

(a) Statutory Reserves

• Section 66 states that at least 1/4 of the net profits should be transferred to Reserve Fund. Registrar has power to reduce it up to 1/10 only. Subject to the rules and the bye-laws, this Fund can be used in the business of the society. However, rule 54 states that Reserve Fund in excess of the paid-up share capital only can be used in the business with the permission of the Registrar.

• Reserve Fund has to be invested in modes specified in section 70 read with rule 54. This investment cannot be drawn upon, pledged or used except with the prior written permission of the Registrar.

(b) Dividend Equalisation Fund

As per rule 52(3), a society may create Dividend Equalisation Fund by crediting to it a maximum of 2% of the paid-up share capital in any year until the fund amounts to 9% of the paid-up share capital. The society can draw upon this fund in any year only when it is unable to maintain a uniform rate of dividend it has been paying during the last preceding 5 years or more.

(c) Bad & Doubtful Debt Reserve

Rule 49 states that bad debts have first to be written off against this fund before being written off against Reserve Fund and Share Capital.

(d) Investment Fluctuation Fund

Rule 55(3) provides for creation of Investment Fluctuation Fund to cover anticipated loss that may arise on disposal of investments held by the society, if not less than 10% of the working capital is invested in securities. This amount is a charge on profit & loss account as per Rule 51(ii). RBI has mandated co-operative banks with demand and time liabilities of Rs.100 crores and above to transfer part of profit on sale of investments to the above fund (UBD. No. BPD.PCB.Cir.12/09.29.00 dt. Sept. 4, 2003)

(e) Bonus Equalisation Fund

As per rule 52(1), a society may create a fund for payment of bonus to persons other than its paid employees, who are not its members.

(f) Education Fund of State Federal Society

Section 68 provides for creation of a fund out of annual contributions given by all the societies to the state federal society at the rates specified in Rule 53. For Maharashtra, the federal society is Maharashtra Rajya Sahakari Sangh Ltd., Pune, which utilises this amount for education and training in co-operation. This amount is payable irrespective of whether the society earns a profit or not and whether a society has declared a dividend or not. This amount has to be paid within 3 months after the close of the co-operative year.

(g) Sinking Fund/Guarantee Fund

Rule 51(i) provides for creation of this fund to ensure due fulfillment of guarantee given by Government in respect of loans raised by the society.

(h) Share Capital Redemption Fund

It is a fund created under rule 51(iii) for redemption of share capital contributed by government or a federal society.

(i) Additional Funds (Optional)

Besides the above funds, a society may create additional funds like Special Reserve Fund, Building Fund, Members Welfare Fund, Staff Welfare Fund, Charity Fund etc. However, the society has to frame rules for the formation of, additions to and use of these funds.

(iii) Deposits and Other Accounts

• Under this head, deposits from “Individuals” means all deposits excluding those from central co-operative banks and other societies.

• Section 26 of the Banking Regulation Act requires banks to submit within 30 days of the close of the calendar year details of all accounts not operated for 10 years.

• Section 45 ZA of the Banking Regulation Act entitles a person to provide for nomination of his deposits.

• RBI has issued a Master Circular on deposits for co-operative banks (RBI/2009-10/78 UBD.BPD (PCB) MC.No. 13/13.01.000/2009-10 dt. July 1, 2009)

(iv) Borrowings

• Section 43 states that in case of a society, which has taken any financial assistance from the Government in the form of share capital, loan or guarantee, the amount the said society can receive as deposits and loans from its members and other persons is subject to restrictions laid down in Rule 35 and in its bye-laws. Rule 35 provides that a society, without the previous sanction of the Registrar, cannot incur liability exceeding in total ten times the total amount of its paid-up share capital, accumulated reserve fund and building fund minus accumulated losses. For central banks, urban banks and producers’ societies, it is 12 times. Any excess liability incurred is to be deposited with central banks and not used in the business of the society.

• Rule 46A prohibits borrowings from non-members.

• RBI has permitted MSCB to get external commercial borrowings (RBI/2005-06/281– A.P. (DIR Series) Cir. No. 23 dt. January 23, 2006)

Verification of items on asset side

(i) Cash

• Rule 107C lays down the maximum cash holding limits for certain societies. The excess amount has to be deposited in an approved bank within 3 days.

(ii) Balance with Other Banks

• Societies are required to obtain prior permission of the Registrar to open bank accounts with banks other than co-operative banks.

(iii) Investments

• Societies are allowed to invest their funds only in modes specified in Section 70 of the MCS Act, read with Rule 55.

• Section 19 of the Banking Regulation Act restricts co-operative banks from holding shares in other co-operative societies.

• RBI has issued extensive guidelines on investments by banks (UBD.BPD(PCB).MC.No. 8/16.20.000/2006-07 dt. July 12, 2006)

(iv) Advances

• RBI has issued a number of Master Circulars updated upto 30th June, 2009 in this regard — Exposure Norms & Statutory/Other Restrictions on Loans & Advances (RBI/2009-10/94 UBD.PCB.MC.No. 1/13.05.000 / 2009-10 dt. July 1, 2009), Guarantees, Co-Acceptances & Letters of Credit (RBI/2009-10/81 UBD. PCB. MC.No.4 /09.27.000/2009-10 dt. July 1, 2009), Finance for Housing Schemes (RBI/2009-10/77 UBD.PCB. MC. No. 2 /09.22.010/2009-10 dt. July 1, 2009), Management of Advances (RBI/2009-10/84 UBD.BPD (PCB) MC. No. 5 / 13.05.000/2009-10 dt. July 1, 2009), Priority Sector Lending (RBI/2009-10/86 UBD (PCB) MC. No. 7 / 09.09.001 / 2009-10 dt. July 1, 2009), Bank Finance against shares and debentures (RBI/2007-2008/96 UBD. PCB. Cir. No.7/ 13.05.000/07-08 dt. July 13, 2007).

• Section 44 of MCS Act, read with rules 41 to 48, regulate the lending activity.

• Section 44 prohibits a credit society from giving loans or accepting guarantees of persons other than its members. Loans to non-members against their deposits are however exempted.

• Section 44 prohibits a society from granting loan against its own shares. Section 20 of Banking Regulation Act has similar restrictions for co-operative banks.

• Rule 41 specifies the portion of working capital that can be used for lending.

• Rule 42 lays down various regulations in respect of loans granted by society.

• Rule 43 stipulates the share linkage limit for borrowers.

• The maximum amount that can be advanced to one borrower by a co-operative bank is prescribed by RBI called Prudential norms, which state that the total exposure (funded + non-funded) should not exceed 15% of bank’s Capital Fund (Tier I + Tier II Cap.) for single borrower and 40% for group of borrowers. The above circular on “Exposure Norms” also outlines the maximum individual as well as aggregate limit of unsecured advances that can be given by banks.

• Rule 45 lays down restrictions on members borrowing from more than one credit society.

• Rule 45A states that loan against pledge of term deposits should not exceed 90% of the deposit amount and the period of loan should not exceed beyond the maturity date of the deposit. If the borrower does not repay the loan, the principal and the interest due can be adjusted against the deposit. For co-operative banks, separate rules have been provided by RBI under which presently the margin limit is nil.

• From October, 2003 loan to directors, committee members and their relatives has been prohibited, except under certain circumstances.

• The law of limitation does not apply to the loan documents executed by a borrower, as long as he continues to be a member of the co-operative society.

(v) Fixed assets

• There is no specific provision for depreciation and its rates under the MCS Act. However, section 65(1), read with rule 49A under sub-clause (vi) states that for calculating net profit, depreciation has to be deducted from the gross profit.

• RBI has mandated banks to charge depreciation on computer @ 331/3% on straight line method (Circular UBD. No. BPD.Cir. 7/09.50.00 dt. August 5, 2003). RBI has also advised banks to amortize the cost of software @ 33 1/3% on straight line method (UBD.BPD.PCB.Cir. No. 287/12.05.001/2005-06 dt. January 24, 2006).

• Under Sec. 9 of B.R. Act, co-operative banks are prohibited from holding any immovable property, whatsoever acquired, for more than 7 years, except those held for own use.

verification OF NON-PERFORMING ASSETs (NPA) – FOR BANKS & CO-OP. SOCIETIES

Since 1992, RBI has been prescribing norms for income recognition and asset classification by banks. RBI’s Master Circular dt. July 1, 2009 updated up to 30-6-2009 (RBI/2009-10/93 UBD.PCB.MC. No.3/09.14.000/2009-10). This Circular also outlines rules and regulations to be followed for the purpose of classification and certain exceptions to the said rules.

Further, RBI has redefined Tier I banks as Unit banks; i.e., banks having a single branch/Head Office and banks with deposits below Rs. 100 crore, whose branches are located in a single district or Banks with deposits below Rs. 100 crore having branches in more than one district, provided the branches are in contiguous districts and deposits and advances of branches in one district separately constitute at least 95% of the total deposits and advances respectively of the bank. All other banks have been defined as Tier II banks. (RBI/2007-2008/259 UBD (PCB).Cir.No.35 /09.20.001/07-08 dt. March 7, 2008).

On similar lines, the Department of Co-operation has issued a circular dt. 10th November, 2004 prescribing norms for income recognition and asset classification by specified co-operative societies, which have been made applicable from the financial year ended 31st March, 2005 (subsequently postponed to 31st March, 2006 and modified from time to time).

Income recognition for Tier I banks

• Account is considered as NPA, if interest due for 180 days is not actually received (This relaxation is upto March 31, 2009 only, after which it will be reduced to 90 days).

• Once an account becomes NPA, all accrued interest not actually recovered has to be reversed and thereafter all interest has to be accounted on receipt basis and not accrual basis.

Asset classification for Tier I banks

• An asset is classified as NPA, if the same is overdue for more than 180 days (This relaxation is upto March 31, 2009 only, after which it will be reduced to 90 days). The various classifications and provisions to be made thereon are as follows:

Asset Classification & Provision for banks

Asset Classification	Provision required
Performing (Standard) Asset (Overdue up to 180 days – to be reduced to 90 days w.e.f. April, 2009)	0.25%
Non-Performing Asset (NPA) (Overdue > 180 days)
— Sub-Standard (NPA up to 18 months-to be reduced to 12 months w.e.f. April 1, 2009)	10%
— Doubtful (Sub-standard/NPA for > 18 months/erosion in security > 50%)	20/30/50% for secured  doubtful O/s up to 1 year/1-3 years/ > 3 years resp.100% for unsecured doubtful advances
— Loss (No chance of recovery/erosion in security > 90%)	100%

Income recognition for Tier II Banks

• Account is considered as NPA, if interest due for 90 days is not actually received.

• Once an account becomes NPA, all accrued interest not actually recovered has to be reversed and thereafter all interest has to be accounted on receipt basis and not accrual basis.

Asset classification for Tier II banks

An asset is classified as NPA, if the instalments are overdue for more than 90 days. The various classifications and provisions to be made thereon are as follows:

Asset Classification & Provision for banks

Asset Classification	Provision required
Performing (Standard) Asset (Overdue up to 90 days w.e.f. 31st March, 2005)	0.25% - 40% (RBI. No. 2008-09/ 300. UBD. PCB.Cir. No. 29/09.11.600/2008-09 dt. Dec.1,2008)
Non-Performing Asset (NPA) (Overdue > 90 days)
— Sub-Standard (NPA up to 12 months w.e.f. 31st March, 2005)	10%
— Doubtful (Sub-standard/NPA for > 12 months/erosion in security > 50%)	20/30/100% for secured doubtful O/s up to 1 year/1-3 years/> 3 years resp.100% for unsecured doubtful advances
— Loss (No chance of recovery/ erosion in security > 90%	100%

Latest Income recognition for specified co-operative societies for F.Y. 2008-09 (as per Circular dated 21-7-2008)

• Account is considered as NPA, if interest due for 3 quarters (9 months) is not actually received. [Applicable for F.Y. 2008-09 and proposed to be reduced to 2 quarters (6 months) for F.Y. 2009-10 and 1 quarter (3 months) from F.Y. 2010-11 onwards]

• Once an account becomes NPA, all accrued interest not actually recovered has to be reversed and thereafter all interest has to be accounted on receipt basis and not on accrual basis.

Latest Asset classification for specified co-operative societies for F.Y. 2008-09

An asset is classified as NPA, if the instalments are overdue for more than 3 quarters (9 months). [Applicable for F.Y. 2008-09 and proposed to be reduced to 2 quarters (6 months) for F.Y. 2009-10 and 1 quarter (3 months) from F.Y. 2010-11 onwards]. The various classifications and provisions to be made thereon are as follows:

• Asset Classification & Provision for Specified Co-operative Societies

Asset Classification	Provision required
Performing (Standard) Asset (Overdue up to 3 quarters [9 months]) (Proposed to be reduced to 2 quarters [6 months] for F.Y. 2009-10 and 1 quarter [3 months] from F.Y. 2010-11 onwards)	Nil
Non-Performing Asset (NPA) (Overdue > 9 months) (Proposed to be reduced to > 2 quarters [6 months] for F.Y. 2009-10 and 1 quarter [3 months] from F.Y. 2010-11 onwards)
— Sub-Standard (NPA up to 12 months)	5%
— Doubtful (NPA > 12 months)	10/15/20% for secured doubtful O/s up to 2 years/ 2-3 years /> 3 years resp. 50% for unsecured doubtful advances
— Loss (No chance of recovery)	100%

Note : NPA provision for small loans up to Rs.10,000/- per borrower need not be provided.

Write-Off of Bad Debts

Rule 49 prescribes 4 steps for write-off of any bad debts

(i) Recommendation by Board

(ii) Certification by Statutory Auditor

(iii) Sanction by general body

(iv) Approval by Registrar.

However, in case of societies classified as A or B at the time of last audit, Registrar’s approval is not required, if the bad debts are written off against Bad Debt fund.

Under Sec. 20A of B.R. Act, prior approval of RBI is required to remit any debt due from past or present directors, or their firms / companies.

verification OF CASH RESERVE (CRR) & STATUTORY LIQUIDITY (sLR) RATIOS

In this regard, RBI has issued a Master Circular on Maintenance of Statutory Reserves (RBI/2009-2010/85 UBD CO. BSD.NSB 1/ Ret /MC No./15/12.03.000/2009-10 dt. July 1, 2009)

• The rules for CRR are provided under section 18 of the Banking Regulation Act.

• The rules for SLR are provided under section 24 of the Banking Regulation Act.

• For scheduled co-operative banks, a different set of rules is provided for CRR and SLR under the RBI Act.

• Rule 41 — A society, which accepts deposits, has to maintain such liquid resources as specified by the Registrar.

Verification of profit & loss account

• Though, as per Accounting Standards, mercantile system of accounting has to be followed, the Act is silent on this aspect. However, reading Rule 49A regarding depreciation, various provisions for income tax, bad and doubtful debts, investment fluctuation, retirement benefits etc., Form ‘N’ of MCS Rules and Forms ‘A’ and ‘B’ of Banking Regulation Act, it appears that the accounts have to be maintained on mercantile basis.

• Section 65 states that net profit has to be determined after deducting the expenses as provided in rule 49-A. It further states that in profit & loss account, provision for Dividend Equalisation Fund and Share Capital Redemption Fund are to be made. These are considered as charges on profit & loss account (under normal accounting principles, these would be appropriations from profit & loss account).

• Rule 107-A gives the maximum rates of travelling and daily allowance and sitting fees payable to committee members.

• Section 68 provides for compulsory provision for payment of Education Fund to State Federal Society, which is a charge on profit & loss account and has to be paid within 3 months after the close of the co-operative year.

• RBI has restricted donations that can be given by Urban banks to a maximum of 1% of the published profits + additional 1% to national funds/other funds sponsored/recognized by Central/State, no matter how much fund is available in the charity or similar funds (RBI/2004-05/418-UBD.(PCB)./BPD/Cir. 43/09.72.00/2004-05 dt. April 11, 2005).

• RBI has further clarified that banks carrying accumulated losses in their Balance Sheet cannot make any donations (RBI/2005-06/186-UBD.(PCB)/BPD/Cir.15/09.72.000/2005-06 dt. October 20, 2005) (Formerly, loss making societies could donate from balance in the Charity Fund).

Rectification

Section 82, Rule 73 — Within 3 months from the date of the statutory audit report, the society has to submit a Rectification Report in Form ‘O’.